Bank of England inject extra liquidity in banking system

Bank of England inject extra liquidity in banking system

Good morning and welcome to today’s foreign exchange market commentary on Monday, the18th of June.

After dragging his feet for months, Bank of England Governor Mervyn King has finally woken up to the realities. The Governor has decided to inject extra liquidity in the banking system and has announced plans to channel extra liquidity into the banking system. On the face of it, the new measures are intended to cushion a possible shock from the eurozone. Nonetheless, some of the UK’s woes are self-inflicted.

BoE has pumped in £325 billion through assets purchases and kept interest rates at historical lows. Still, borrowing costs in UK are high and liquidity tight. The biggest sufferers have been small business owners for whom there are few alternatives to bank financing.

The central bank will lend multi-year loans of up to £80 billion to banks at below market rates. The government will indemnify against subsequent losses. The BoE will conduct bi-annual auctions as well to ease liquidity strains later. However, it remains to be seen if the new measures will work as many bankers point out that the low loan off-take is due to lack of demand, not due to liquidity crunch.

Part of UK’s problems lie in the large private sector debt and government austerity measures.  King’s plans for tax-payer subsidised loans may not make bank loans cheaper though they make long-term sense. The authorities have started to realise that loose monetary policies fail to boost the economy if the banking system is dysfunctional.  The newly set up Financial Policy Committee of the BoE is a step in the right direction.


GBP/EURO – 1.2362
GBP/US$ – 1.5692
GBP/CHF – 1.4853
GBP/CAN$ – 1.6010
GBP/AUS$ – 1.5526
GBP/ZAR – 12.9612
GBP/JPY – 124.32
GBP/HKD – 12.1718
GBP/NZD – 1.9784
GBP/SEK –  10.9313

EUR: The single currency finished the day near flat on Friday with the EUR/USD managing to limit their losses as investors continued to cover short euro positions just in case Greek pro-bailout party won the polls. A report released by Bloomberg late Friday showed many ECB members would be comfortable with a rate cut below one percent failed to have any impact on the euro. Even high Spanish borrowing costs close to seven percent failed to weaken the single currency due to heavy position squaring by traders. The pound rallied against the euro following Bank of England’s announcement of added measures to boost lending in the country. The GBP/EUR pair got further fillip after the Swiss national Bank said it would diversify its forex reserves by diversifying into cable also. The win by pro-bailout parties in Greece has been a positive for the single currency. Markets are hoping for a formal announcement between the New Democratic Party and PASOK Party soon, a development that would reduce chances of an imminent Greek exit from the single-currency zone. The GBP/EUR opens at 1.2361 this morning.

USD: The cable tumbled in early morning trade on Friday over the dovish mansion House speech by Governor Mervyn King and announcement of a £100 billion in emergency liquidity funding for the UK banking system to fight off a European turbulence. A wider trade deficit for April offered little help to Sterling. However, UK bank stocks rallied soon after King’s announcement, pushing the cable up to a two-week high of 1.5701. Sterling found added support after rumours suggested the Swiss National Bank was considering replacing some of its ample euro holdings with Sterling. The greenback weakened further over chatters of imminent monetary easing measures by the Fed as the world’s largest economy shows signs of slowing down. The greenback ended the week on a weaker footing as demand for safe assets dropped over hopes that pro-bailout parties will win in Greece. GBP/USD opens at 1.5697 this morning.


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